When it comes to LLCs and unemployment taxes the “more money more problems” can apply as you grow and hire. In fact the key to knowing if you owe unemployment taxes is generally straightforward:
If you hired or are an employee of your LLC then you have to pay state and federal unemployment insurance.
There are a few situations that can cause some confusion here and we’ll go into each one. We’ll also cover how to calculate unemployment taxes (state and federal), as well as how to start paying them. However if you’d like to jump to the state by state tax table for real examples you can check that out below.
A federally required, state run, insurance for former employee's that lose their jobs while meeting eligibility requirements. This tax is collected as part of a group known as "payroll taxes".
What are Unemployment Taxes
As an LLC owner you've likely heard the term "payroll taxes" at some point, which are a group of taxes that include unemployment. If you’ve ever held a regular W-2 job you’ve actually been paying these taxes through withholdings from your paychecks.
Let's get the technical jargon out of the way, since unemployment taxes are called by many names. These include: State Unemployment Tax Act (SUTA), State Unemployment Insurance (SUI), and Federal Unemployment Tax Act (FUTA). Because SUTA and SUI refer to the same thing there’s only 2 unemployment taxes most employers pay.
Now that you know what we’re dealing with, we'll go over some situations that cause LLC owners to ask if they owe unemployment insurance.
TAn unofficial name for the group of taxes paid by employees each time they take a salary or wage. These taxes are withheld from employee paychecks by their employer.
What If You Hired a Freelancer?
This answer applies to any 1099's, contractors, agencies, and self employed freelancers you've hired:
No, you do not have to pay their unemployment taxes
This is because those particular individuals you've contracted to work with you aren't considered your employees. Secondly since they are distinct legal entities from your LLC they couldn't possibly be considered your employee’s. Now if you're thinking of making your employees contractors keep in mind there’s potentially serious legal concerns that you may encounter doing that.
What If I Paid an Investor?
If your LLC has investors, known as “limited partners” for legal purposes then:
No, you do not have to pay investors unemployment taxes
This is of course assuming your investors really do meet the rigid requirements of a limited partner. Investors or passive shareholders aren’t compensated with wages or a salary, which is what ways unemployment taxes. These investors are usually compensated with distributions which don’t encounter payroll taxes.
What If I Paid Myself?
Here we run into the “well it depends” questions. The questions below assume that you are actively involved in running your business and are not considered a passive shareholder.
- Are you considered a W-2 employee of your company?
- Did you opt to tax your LLC as either a S Corp or C Corp?
If you answered yes to either of these questions, then you have to pay unemployment taxes.
You may want to check with your CPA or tax professional to be sure, however if you answered no to both of these questions then you can avoid unemployment taxes for now.
How Are Unemployment Insurance Taxes Calculated
There's basically 2 parts of unemployment insurance: the state and the federal. The state insurance differs a lot depending on the state, which you can see in the table below. To calculate any unemployment insurance you'll need 3 numbers: the employee's salary, wage base, and employer wage rate. Here's the basic equation:
(Salary or Wage Base) * Wage Rate = Tax
When choosing between the salary or wage base, simply pick the smaller value of the two. In this way unemployment insurance is capped to a maximum per year. Here’s a real world example for a Virginia employee:
- Salary = $20,000
- Wage Base = $8,000
- Employer Wage Rate = 2.51%
Here’s that calculation: $8,000 * 2.51% = $200.80
To get your state's wage base APS Payroll keeps an up to date list here, which will be the same for all employers. To get your wage rate however you’ll need to contact the agency in your state that runs the unemployment insurance program. Usually you get the new employer rate by default unless you're in construction, in which case you'll be given a higher rate.
How Much Are Unemployment Taxes
Below are the 2020 Unemployment Taxes for a single employee in 50 U.S. States. All these amounts are calculated using new employer rates and include FUTA. They are sorted from least to most expensive.
|State||$10,000 Salary||$20,000 Salary||$30,000 Salary|
As you can see unemployment taxes generally don’t change much after $10,000 of salary except for states with highest SUTA taxes (looking at you Minnesota).
How To Pay Unemployment Taxes
Before you start running payroll on your employees it’s a good idea to get enrolled in your state’s unemployment insurance program. Every state’s agency is different however you can find your state’s agency on this list. You likely want to walk through this process with your tax professional so streamline this process.
Once you are enrolled you should have your employer wage rate. Since you’re new to the program you’ll likely be given the new employer rate. Once you have that key number you’ll be able to ready pay SUTA taxes.
It’s important to keep in mind that paying SUTA is part of “running payroll” on an employee’s salary. Many LLC owners choose to outsource this work to their tax professional in order to keep them compliant. Important to keep in mind that there’s generally ongoing paperwork and filings that your tax preparer can help you with. If you choose to do this yourself it’s best to use a payroll service to help you.
How To Reduce Unemployment Insurance Taxes
There’s a few states, looking at you Minnesota, where the unemployment taxes are noticeably higher. In these cases it can make sense to try and opt out of the state unemployment in favor of the federal unemployment. Example: if you have a salary of $30,000 in Minnesota that means a total unemployment of $1206 (SUTA and FUTA).
Like we’ve discussed if you are not covered by a state unemployment program the federal program sets a higher rate of 6%. So your FUTA would now become $420 ($7000 * 6%) saving you roughly $786… not bad!
Keep in mind before opting out of SUTA that: it may not be possible and it may require extra paperwork. So this is something you’ll want to speak with your CPA about. Also, keep in mind your employer rate may go down over time as your state agence has more experience with your business. Finally be sure you really don’t want the insurance from your state before opting out.
Since you’ve made it this far, I expect that you have an employee or perhaps are one yourself. A good next step would be to speak with CPA to become compliant with your state agency. If you expect to pay significantly more than $420 on your employee unemployment insurance tax professional about potentially opting out of your state’s unemployment insurance.
For the majority of employers you’ll likely be paying both FUTA and SUTA. In that case be sure your payroll is being run properly and paying all the necessary SUTA/FUTA taxes. Lastly, work with your tax pro being proactive about staying compliant at both the state and federal level.